Modelling Acreage, Production and Yield Supply Response to Domestic Price Volatility

This paper deals with the impact of domestic price volatility on acreage, yield and production of wheat, rice and maize for a set of 66 developing countries. We exploit a dataset ranging from 2005 to 2012 of domestic prices collected from FAO-GIEWS, WFP and FEWS.NET. The resulting system is estimated with a one-step System Generalized Method of Moments (GMM-sys). We show that farmers respond negatively to price instability reducing production, acreage allocation and yield. According to our estimates high expected prices determine an increase of the quantity produced and a raise in maize acreage and rice yields. Non-price factors have also a significant role on supply response. Among all, we show that climate shocks, agricultural inputs and macroeconomic variables such as the financial deepening, influence the ability of farmers to cope with price risks. Financial deepening in part mitigates the negative effect of price instability on the producers’ welfare, suggesting that policy reforms aimed at favouring implementation of developing countries’ financial sector can help farmers to respond more efficiently to prices changes.